Stocks moved slightly higher last week as investors focused, yet again, on hopes of another stimulus package and optimism over 3rd quarter earnings. Talks between the White House and Congress continued last week with both sides expressing optimism about a new round of stimulus, yet politics continue to weigh heavily on the process as the finger pointing continues. With the election just two weeks away it seems unlikely that a deal will get done before then.
For the week, the DJIA closed higher by 0.07% while the S&P 500 gained 0.21%. The Nasdaq closed higher by 0.79%. Small company stocks, represented by the Russell 2000, bucked the trend and gave back some ground as the index closed lower by 0.22% for the week. International stocks were mixed. For the week, the MSCI EAFE index lost 1.45% while emerging market equities (MSCI EM) tacked-on 0.15%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher by 0.24%. As a result, the 10 YR US Treasury closed at a yield of 0.76% (down ~3 bps from the previous week’s closing yield of ~0.79%). Gold prices closed at $1,900.80/oz. – down 0.97% on the week. Oil prices moved higher as oil closed at $40.88 – up 0.69% on the week.
Economic news released last week was mixed. On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) advanced 0.2% in September, matching expectations. Core CPI, which excludes food and energy, also gained 0.2% (in-line with expectations). On Wednesday, the U.S. Bureau of Labor Statistics reported that the Producer Price Index (PPI) gained 0.4% in September, ahead of expectations for a 0.2% advance. On Thursday, the Department of Labor reported that initial jobless claims for the week ending October 10 were 898,000, outpacing expected claims of 830,000. On Friday, the Federal Reserve announced that September’s industrial production fell 0.6%, missing expectations for a 0.5% decrease. Total industrial production is down 7.3% from the same time last year. In the week ahead look for news on housing starts, weekly jobless claims, existing home sales and Markit PMI.
Third quarter earnings season for the S&P 500 is off to a good start. With only 13% of S&P 500 companies reporting thus far, the largest twelve companies that have already reported have beaten estimates by over 20%. We see third quarter earnings as supportive of further gains in the market. However, offsetting earnings optimism will likely be spikes in Covid-19 around the world and continued bickering in Washington.
Expect increased volatility in the weeks ahead. The upcoming election will keep investors and markets on edge. We urge investors not to overthink the current wall of worry and to stick close to long-term target asset allocations with a slight defensive bias.
‘The will to succeed is important, but what’s more important is the will to prepare.” – Bobby Knight
Markets bounced around last week on news of additional stimulus. On Monday, President Trump tweeted that he had instructed his representatives to stop negotiations until after the elections driving equity markets down. By week end, that appeared to have been a negotiating tactic as President Trump indicated that he would be amenable to a stimulus package totaling $1.8 trillion (still short of the Democrats’ request of $2.2 trillion). For the week, U.S. equity markets finished solidly up with the S&P 500, DJIA and NASDAQ up 3.9%, 3.3% and 4.6%, respectively. So far, the month of October has started on a strong note with 2 consecutive up weeks for equities. The strongest sectors last week were materials, energy and technology as stocks continued to broaden out. The weakest sectors were staples, communication services and real estate. International equities also advanced despite a “second wave” of Covid-19 cases in Europe. The MSCI EAFE index and emerging markets finished up 3.0% and 3.8% for the week.
It was a very light week in terms of economic releases. On Monday, the Institute of Supply Management (ISM) reported their non-manufacturing index increased to 57.8% for September, exceeding expectations. This week, look for reports on CPI/PPI, retail sales, industrial production and consumer sentiment. Also, 3rd quarter earnings season begins this week with reports from major banks. Investors will be looking to see if bank loan loss reserves taken earlier in the year are sufficient. Analysts expect companies in the S&P 500 to report a median per-share drop of 20% in earnings. However, analysts have actually grown more optimistic during the past three months raising estimates by 4.1%.
In fixed income markets, rates generally rose as the Fed has been indicating that it would let inflation run above 2% for an extended period of time. The yield on the 10 year U.S. Treasury note rose to 0.79% from 0.70% the week prior.
Look for volatility to continue as we approach the election. While it is important to monitor potential policies, there are many dynamics at play. So continue to stay diversified and rebalance as necessary.
“Kind words do not cost much. Yet they accomplish much.” – Blaise Pascal
The big story of the week was President Trump and First Lady tested positive for Covid-19. The news only added to the uncertainty and turmoil around the election. September’s job growth was by far the lowest since the recovery from last March. A $2.2 trillion Democratic stimulus plan was passed by the House on Thursday evening in a 214-207 vote. Senate Majority Leader Mitch McConnell has opposed the plan and hopefully more negotiations will follow.
For such a distressful week, the financial markets performed surprisingly well. The Dow Jones Industrials rose 1.9%, the S&P 500 and the Nasdaq each gained 1.5%, and small companies, as measured by the Russell 2000, gained 4.4%. Foreign markets had similar gains as developed equities (EAFE) returned 1.6% and emerging equities (EM) were up 2.2%. The yield on the 10YR U.S. Treasury rose slightly to 0.70% from 0.66% the previous week. Gold prices closed at $1,903/oz. which was up over 2% on the week.
The U.S. economy added 661,000 jobs in September, missing estimates of 800,000 new jobs. However, the unemployment rate came in better than expectations improving to 7.9% from 8.4% in August. The labor force participation rate decreased 0.3% which serves as a sign people are leaving the labor force. Personal income decreased 2.7% in August slightly missing estimates as pandemic related assistance programs slowed down. Lawmakers are still struggling to reach an agreement for injecting more fiscal stimulus into the economy. Airlines, hospitality companies and banks continue to announce furloughs and job cuts. On the positive side, consumer confidence remained strong followed by a decent ISM manufacturing PMI release.
U.S. stock valuations remain historically high with a forward price-to-earnings (P/E) multiple for the S&P 500 at 23x. Technology and consumer discretionary companies have led the way for markets in 2020 while more cyclical companies have been struggling. Energy companies have really been hurt by sluggish global oil demand and concerns about a new stimulus package that has sent crude oil prices down below $38.00 per barrel.
There will be a few economic data releases to keep an eye on this week. On Monday the ISM services index will be reported, the JOLTS job openings on Tuesday, and on Wednesday, the minutes of the September Federal Reserve meeting.
We hope and pray for the president and first lady and all those affected by the coronavirus a speedy and full recovery. We remain a bit cautious about financial markets near-term as focus should remain on asset allocation, valuations and high-quality assets.
“Although the world is full of suffering, it’s full of also overcoming it.” – Helen Keller
ND&S Weekly Commentary 10.26.20 – Markets Take a Breather
October 26, 2020
U.S. equity markets pulled back last week as investors weight the uncertainties surrounding the election and rising Covid-19 infections around the globe. Additionally, a lack of fresh stimulus will likely further weigh on the economy in the short-term.
For this past week, the S&P 500 declined 0.51% while the DJIA gave back 0.90%. The tech-heavy NASDAQ finished the week -1.06% as money moved out of more growth areas. Small company stocks, represented by the Russell 2000, again bucked the trend as the index closed higher by 0.42% for the week. International equity markets also finished in the green as the MSCI EAFE and emerging markets (MSCI EM) added on 0.11% and 1.11%, respectively. Bonds took it on the chin for the week as the Bloomberg/Barclays Aggregate, finished the week down 0.42%. As a result, the 10 YR US Treasury closed at a yield of 0.85% (up 9 bps from the previous week’s closing yield of 0.76%). Gold prices closed at $1,904/oz. – up fractionally on the week. Oil (WTI) moved lower to close at $39.88 – down 2.5% on the week.
Economic news released last week was mixed. The U.S. Census Bureau reported that housing starts increase 1.9% to a seasonally adjusted rate of 1.415 missing estimates for September. Conversely, existing home sales jumped 9.4% for the month which far outpaced estimates. Overall, existing home sales are up 21% from the same time last year reflecting the strength of the housing market. Weekly jobless claims were 787,000, marking a 55,000 improvement from the week prior. On Friday, the IHS Markit Flash U.S. Composite PMI registered a reading of 55.5 for October. The “flash” reading is a preview to the official release with any reading over 50 representing expansion. The week ahead will have reports on personal income and expenditure, durable goods orders, new home sales, and the initial release of 3Q20 real GDP.
Third quarter earnings season is in full swing this week with Apple, Microsoft, Mastercard, Pfizer, and Facebook among the many scheduled to report. Although it is early, thus far, results have generally surprised to the upside with 83% beating on EPS and 74% on revenues according to data from FactSet. Much of the market reaction to releases will be the result of guidance from the respective companies.
We are thankfully in the final stretch of the election season. The hyper partisanship will likely lead to a record turnout at the polls. The election aside, the volatility in equity markets will likely increase this week due to spikes in Covid-19 globally and the busy week for company results and updates. As always, investor focus should remain on long-term goals.
“Out of difficulties grow miracles.” – Jean de la Bruyere